SUBMITTED TO: Mr SAMEER BHAT

ECONOMIC ENVIRONMENT OF BUSINESS

NAME: USAID QUERSHI
ROLL NO.: 06

Recession and Its Consequences
In economics, a recession is a business cycle contraction, a general slowdown
in economic activity. Macroeconomic indicators such as GDP, employment,
investment spending, capacity utilization, household income, business profits,
and inflation fall, while bankruptcies and the unemployment rate rise.
Recessions generally occur when there is a widespread drop in spending (an
adverse demand shock). This may be triggered by various events, such as a
financial crisis, an external trade shock, an adverse supply shock or the
bursting of an economic bubble. Governments usually respond to recessions
by adopting expansionary macroeconomic policies, such as increasing money
supply, increasing government spending and decreasing taxation.

Definition
In a 1975 New York Times article, economic statistician Julius Shiskin suggested
several rules of thumb for defining a recession, one of which was "two down
consecutive quarters of GDP". In time, the other rules of thumb were
forgotten. Some economists prefer a definition of a 1.5% rise in unemployment
within 12 months.
In the United States, the Business Cycle Dating Committee of the National
Bureau of Economic Research (NBER) is generally seen as the authority for
dating US recessions. The NBER defines an economic recession as: "a
significant decline in economic activity spread across the economy, lasting
more than a few months, normally visible in real GDP, real income,
employment, industrial production, and wholesale-retail sales."[5] Almost
universally, academics, economists, policy makers, and businesses defer to the
determination by the NBER for the precise dating of a recession's onset and
end.
In the United Kingdom, recessions are generally defined as two successive
quarters of negative growth.
Attributes
A recession has many attributes that can occur simultaneously and includes
declines in component measures of economic activity (GDP) such as
consumption, investment, government spending, and net export activity.
These summary measures reflect underlying drivers such as employment levels
and skills, household savings rates, corporate investment decisions, interest
rates, demographics, and government policies.
Economist Richard C. Koo wrote that under ideal conditions, a country's
economy should have the household sector as net savers and the corporate
sector as net borrowers, with the government budget nearly balanced and net
exports near zero. When these relationships become imbalanced, recession
can develop within the country or create pressure for recession in another
country. Policy responses are often designed to drive the economy back
towards this ideal state of balance.
A severe (GDP down by 10%) or prolonged (three or four years) recession is
referred to as an economic depression, although some argue that their causes
and cures can be different.[4] As an informal shorthand, economists
sometimes refer to different recession shapes, such as V-shaped, U-shaped, L-
shaped and W-shaped recessions.
Impacts

Unemployment
Unemployment is particularly high during a recession. Many economists
working within the neoclassical paradigm argue that there is a natural rate of
unemployment which, when subtracted from the actual rate of
unemployment, can be used to calculate the negative GDP gap during a
recession. In other words, unemployment will never reach 0 percent and thus
is not a negative indicator of the health of an economy unless it is above the
"natural rate," in which case it corresponds directly to a loss in gross domestic
product, or GDP.

The examples and perspective in this article deal primarily with the United
Kingdom and do not represent a worldwide view of the subject. Please
improve this article and discuss the issue on the talk page. (August 2011)
The full impact of a recession on employment may not be felt for several
quarters. Research in Britain shows that low-skilled, low-educated workers and
the young are most vulnerable to unemployment in a downturn. After
recessions in Britain in the 1980s and 1990s, it took five years for
unemployment to fall back to its original levels.[44] Many companies often
expect employment discrimination claims to rise during a recession.
Business
Productivity tends to fall in the early stages of a recession, then rises again as
weaker firms close. The variation in profitability between firms rises sharply.
Recessions have also provided opportunities for anti-competitive mergers,
with a negative impact on the wider economy: the suspension of competition
policy in the United States in the 1930s may have extended the Great
Depression.
Social effects
The living standards of people dependent on wages and salaries are more
affected by recessions than those who rely on fixed incomes or welfare
benefits. The loss of a job is known to have a negative impact on the stability of
families, and individuals' health and well-being.
General Decline
During a recession, there is a general decline in importations and exportation
across the board. This reduction is due to businesses and consumers not
having the money to buy an imported good. The exporting country then has
less money to buy imported goods for itself. This cycle continues until the
recession is over.

Protectionism
During recessions, there is a general rise in protectionism, which is one of the
reasons why the Great Depression was so bad. Protectionism is when countries
use tariffs and regulations to prevent foreign companies from entering the
domestic market. This "protects" domestic companies by keeping out
competition; however, it hurts the country in the long run. This is because
consumers are then forced to pay higher prices for goods since there is less of
a supply, as there are less goods being imported.

Increasing Prices
The price of certain imports and exports can actually rise during a recession as
the level at which it was bought may fall below a critical economy of scale
level. Economy of scale is when the cost of an individual unit decreases as
more units are made. This is because fixed costs can be spread out over a
greater amount of units. However, if the levels of a good falls below a certain
amount, the prices have to go up to make up for the smaller amount sold.

Supply Shock
Supply shock can be both a cause and effect of a recession. Supply shock refers
to a situation when there is a lot more supply of a good then there is a demand
for it. In the short term, this can cause a great increase in exports and imports
of a certain good due to the lower price. However, in the long term, it can
depress imports and exports of the good as the companies that produce it go
out of business.
Recession impacts exports
For the first time in five years, India's export growth has turned negative.
Exports for October 2008 contracted by 15% on a year-on-year basis. This
should not surprise as the OECD economies that account for over 40% of
India's export market have been slowing for months.
With the US and EU already entering a phase of recession, India's export
growth had to fall sharply. It must be noted this growth contraction has come
after a robust 25%-plus average export growth since 2003. A low-to-negative
growth in exports may continue for sometime until consumption revives in the
developed economies.
A decelerating export growth has implications for India, even though our
economy is far more domestically driven than those of the east Asia. Still, the
contribution of merchandise exports to GDP has risen steadily over the past six
years from about 10% of GDP in 2002-03, to nearly 17% by 2007-08. If one
includes service exports, the ratio goes up further. Therefore, any downturn in
the global economy will hurt India. There also seems to be a positive
correlation between growth in exports and the country's GDP. For instance,
when between 1996 and 2002 the average growth rate in exports was less
than 10%, the GDP growth also averaged below 6%.A slowdown in export
growth also has other implications for the economy. Close to 50% of India's
exports textiles, garments, gems and jewellery, leather and so on
originate from the labour-intensive small- and medium-enterprises. A sharp fall
in export growth could mean job losses in this sector. This would necessitate
government intervention. A silver lining here, however, is the global slowdown
will also lower cost of imports significantly, thereby easing pressures on the
balance of payment. The impact of oil and other commodity prices, halving
over the past few months, will reflect in the import data for the second half of
2008-09. Oil import bill, earlier projected to cross $100 billion in 2008-09 with
prices surging to $140 per barrel, could easily shrink by about $20 billion. The
fall in imports may exceed the decline in exports in the latter half of 2008-09.
This would also help soften the current account deficit.